It’s Time to Let Kraft Heinz Out of the Penalty Box

Dividend Stocks

After years of underperformance marked by a dividend cut, Kraft Heinz (NYSE:KHC) is on the move again. That makes Kraft Heinz stock a more interesting proposition.

With its Q4 Mess Now History, Betting on Kraft Heinz Makes Sense

Source: Casimiro PT / Shutterstock.com

The shares are up 8.3% so far in 2020, beating the S&P 500’s 2% gain. They have been rebounding after another down quarter, marked by $2.9 billion of write-downs on some of the company’s best-known brands.

Investors are attracted to the dividend, a 40-cent-per-share payout that yields 4.6%. They’re focused on increased sales, $6.65 billion for the quarter ending in June, up 3.8%, and looking at adjusted earnings of 80 cents per share.

The company’s past decisions to focus on core brands and aggressively write down assets caused it to lose half its market cap over five years. But now they look like they’ll lead to maximum pandemic profits.

Pounding the Table Softly

Analysts are starting to pound the table softly for Kraft Heinz stock.

They have praise for the new CEO, Miguel Patricio, brought in last year from Anheuser-Busch Inbev (NYSE:BUD). The maker of Budweiser, like Kraft Heinz, is controlled by Brazil’s 3G Capital.

They see Americans eating at home rather than going out. A return to lockdown conditions should benefit the stock. 

The aggressive write-downs, poor performance in the past, and the pandemic have analysts calling Kraft Heinz stock a long-term turnaround play. The idea is that sparkly tech stocks are vulnerable, but ketchup and sliced American cheese will find a foothold no matter how bad things get.

The go-go 2010s were very bad for companies like Kraft Heinz. It frustrated the dreams of the best-known names in business, who tried to squeeze bigger profits from the ketchup bottle.

First Warren Buffett of Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) took control of Heinz, the condiment company. Then in 2015 he merged it into Kraft, which 3G had already taken over. At one point in 2017 the shares were trading at nearly $100 each. They bottomed last year, soon after Patricio joined the company, in the $20s.

Pandemic Brands

Kraft Heinz is more than cheese and ketchup. Acquisitions have also brought it such products as Jell-O dessert mixes, Ore-Ida tater tots, Kool-Aid and Capri Sun drinks, Planter’s peanuts, and Maxwell House coffee.  Mr. Yoshida’s is a Kraft Heinz product. So are Baker’s Chocolate and Stove Top stuffing mix. The company has operations in India, China, Japan, Australia, and across Europe.

That’s why, despite the huge loss, Kraft Heinz results were called stronger than expected.  Barclays (NYSE:BCS) maintained a hold rating on the shares.

Food analysts called the results solid and indicated more good quarters are coming.

Patricio plans to increase advertising by up to 40% during the second half of the year. This will likely include social media, an area where another 3G company, Restaurant Brands International (NYSE:QSR), struck gold with the Popeye’s chicken sandwich. Kraft Heinz did a burial and rebirth for its “Mr. Peanut” last year and is pushing Velveeta with the Twitter handle @eatliquidgold.

The Bottom Line for Kraft Heinz Stock

Kraft Heinz is one of the best stocks you could buy if you believe things are about to get worse.

The Brazilians seem devoted to the dividend, which offers a fat yield. Their product mix is perfect for the lockdown. Past performance has been written down and written off.

The question now is what happens after the pandemic is over. Sales may increase this year, and profits may also increase. But at some point, people will be seeing one another again. Will they still want macaroni, cheese, and ketchup?

While analysts are calling Kraft Heinz a long-term play, it might be better to consider it a short-term speculation on bad times. Collect the dividend, watch it rise, then get out when we have a vaccine.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear,  available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. 

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